Afghanistan may attract more energy firms as Exxon shows interest

July 16, 2012|Amie Ferris-Rotman and Ramya Venugopal | Reuters

KABUL/SINGAPORE (Reuters) - More top-tier energy companies are likely to join the race to explore for oil and gas in Afghanistan after the world's biggest publicly traded firm, Exxon Mobil , changed perceptions of what the country may hold by showing interest in drilling.

Energy majors are exploring new frontiers in pursuit of fresh reserves as they exhaust existing fields and Afghanistan, after decades of conflict, remains little explored.

While the U.S. government estimates the country holds a fraction of the reserves of surrounding giant Middle East producers, its potential is enough to attract Exxon Mobil and that factor, by itself, is likely to lure more.

Kabul, which has long depended on international donations to finance its economy, now hopes revenue from raw materials will help the country stand alone, especially as an impending pullout of most foreign troops by the end of 2014 is creating donor fatigue.

"Exxon would not go into an area unless the areas are very promising. They are not looking for potatoes," said Chakib Khelil, former Algerian oil minister, now an energy consultant in Paris.

The search for fresh assets by big companies such as Exxon, which produce a lot could mean "going to the Arctic, going deep off-shore and going into new areas like Afghanistan," he added.

Eight firms including Exxon this month expressed interest in an oil and gas auction of six blocks in the Afghan-Tajik basin, after a tender was won by China National Petroleum Co (CNPC) late last year.

Afghanistan has about 1.9 billion barrels of undiscovered technically recoverable crude reserves, the United States Geological Survey (USGS) said in 2011, although it didn't say how much of it was economically recoverable.

That compares to Equatorial Guinea, which has proven reserves of 1.7 billion barrels and produces about 250,000 barrels of crude a day, according to BP's latest annual statistical review.

With oil hovering around $100 a barrel, an output of 250,000 bpd would earn Afghanistan about $9.1 billion a year. That would be roughly half the country's gross domestic product of $20 billion in 2011, according to the World Bank.

The country also has an estimated 59 trillion cubic feet of natural gas reserves, about half that of the proven reserves in neighboring Iraq, according to BP.

The Tajik basin, for which Kabul invited bids earlier this month, has about 946 million barrels of crude and 7 trillion cubic feet of natural gas reserves, the survey found.

The Amu Darya basin, which CNPC, China's biggest oil and gas producer, is exploring after it won the tender last year, has 962 million barrels of crude and 52 trillion cubic feet of natural gas, according to USGS.

SECURITY ISSUES

However, drilling in Afghanistan is fraught with risks, most notably those related to security, and sovereign risk is a serious concern.

Violence in Afghanistan was at its worst this year since the Taliban regime was toppled 10 years ago, United Nations said.

Besides violence, companies operating in the country also have to deal with the still prevalent infighting between groups, which could disrupt their operations.

For instance, CNPC's Amu Darya project has met with severe interference from militia loyal to former warlord and army chief of staff General Abdul Rashid Dostum, the government says.

Dostum's supporters have been allegedly demanding a share of the proceeds, a claim the general's National Front party denied.

Still, for the oil companies, which operate in some of the world's most conflict-ridden areas, including Iraq, Nigeria and Sudan, this is just an occupational hazard.

"Security is an issue but it's not an issue that will bar them from being involved in the country," said Khalil, citing cases such as Iraq, where companies continue to operate and provide their own protection, with the help of the government. "But you need to have a good return to justify the risk."

AIDING GROWTH

The country, among the world's poorest, will need around $6 billion to $7 billion of aid a year to grow its economy, on top of a $4.1 billion bill for security forces to maintain peace after foreign combat troops leave, the head of Afghanistan's central bank said last month.

Mining reserves "is not a magic solution. And we're going to have to see this develop over the longer term. Many of these are very large projects... so it will take time before you see those benefits," said a U.S. embassy official in Kabul.

Still, exploration in the country will be an uphill task as the geology has not been closely studied or well understood, said Alan Troner, head of the Houston-based Asia-Pacific Energy Consulting.

And Kabul has still to put its own house in order before it becomes a destination for more energy companies.

"Looking at the lack of transparency, widespread corruption and no security, I am not optimistic that other powerful companies in the world would invest in Afghanistan," said Yama Torabi, executive director of Integrity Watch Afghanistan, a civil organization promoting transparency.